whereaminow (< 20)

Quick Thoughts

30

Hi everyone. I'm actually in the good ole U.S.ofA. right now! America...... **** yeah! Unfortunately, I'm here for a funeral (not America's, nor Uncle Sam's, but in fact my Uncle. He was a great man and he will be missed.) The trip itself has been exhausting and included an airport mixup in Rome, lost luggage (American Airlines.....you suck), a borrowed suit, 3am wakeups because I can't get my body adjusted, and a job interview (I already have a job! Leave me alone!) Oh, and a funeral. Very sad and crazy week.

Some quick thoughts.

Last year Americans paid $1 trillion in taxes. This year, the Federal Reserve created well over $1 trillion and gave it away. Why do Americans still pay taxes? If the government needs money, the Fed can create it. If they can't create it all the time, then why? Krugman told me that quantitative easing was good. If it's not good all the time, how is it good? When does he know when it's good and when it's bad?

So explain to me why you pay taxes.

Last year, the interest on the national debt was $406 billion. So almost half the money collected in taxes went to service the debt on past borrowing. What was the operating budget of the IRS? Anyone? Let me know. I'm curious as to the final clearing of America's tax money. How much was actually left over for ...ahem... good government?

You can't un-create money. It's not possible. You can destroy a currency through debasement, but once you've made money and placed it in the economy, you can't un-create it. Take a gold coin for example. Once it's minted and stamped, can the creator of the coin seek it out, find it, and destroy it? Very unlikely. What about Federal Reserve notes. Can Bernanke identify the created money, find it and pull it back? Can he pull back the equivalent amount that he created (it's all fungible right?) From where? whom? How will he do it? How will he un-create what he has created?

Obviously he won't. He can't. Of course, the Fed never has, which is why the value of the dollar has declined over 95% since 1913.

So how does money increase in value? Simple. Worker productivity has to increase faster than the creation of currency. The price of goods will fall relative to the money supply. This is good. This is the way capitalism works when the government, banks, and rent seekers don't destroy our freedom to cooperate, create, and exchange. The whiny unions and do-gooders don't have to cry about living wages or whatever they call it. The price of goods falls. Everyone is richer. The poor can afford more things and you don't have to keep increasing the minimum wage or bargaining for higher wages to chase the inflation train. Government is the problem.

Has this happened before? Has the currency increased in value thanks to increased productivity? Many times. For one example, read Milton Friedman's A Monetary History of the United States. Note the money supply and dollar value from 1871-1900.

There is a knowledge problem inherent in central planning, including the Federal Reserve's central planning of money. Every piece of information used to plan is past information. Unfortunately, the market is the ever evolving subjective evaluations of individual actors. The preferences, tastes, and values held by producers and consumers is constantly evolving. Once the central planners have figured it out, if they can (and that's quite a stretch), it's already changed. This is why they always appear to be bumbling idiots.

Take the interest rate for example. The Fed targets a rate, and handles monetary policy in order to achieve that rate. Let's say they choose, for reasons they believe to be important, 5.5%. That is now the price of money. Why not 5.51%? Why not 16.7%? Why not 5.49999999999999983%? Why not allow the market to set the price of money? The Fed can never be right about the interest rate. Never. It would require the ability to peer into the brains of every single individual actor in the market place to determine their subjective evaluations of the price of money. And EVEN if they could do that, by the time the information was assembled and an interest rate was chosen, the market would have changed its mine.

Hate capitalism all you want, but understand it. It can't be planned. If you are planning, you are doing something else: fascism, socialism, syndacalism, mercantilism. Take your pick. You may like one of those, but when your plans fall short, as they always do, don't take away my freedoms, ok? Deal? Thanks.

When you pay your debt back to the bank, it is taken out of circulation. On condition that another loan does not replace it.

Also, banks paying interest on reserves, that is also taken from the system.

There are ways to take money from the system, but it will cause the US economy to implode, because eveyone is indebted to their eyeballs. If there are no new loans, or if in fact the government is not printing money, money supple will decrease by itself. Though very unlikely. Circa 1929.

Tecnically, Bernanke can unprint these dollars as easily as he printed them. The only trouble is, he won't. Why would he do that when all his friends - GS, JPM, and AIG-that-owes-money-to-GS - make their living off his printing press? The only question worth debating is how many more trillions he will print.

Yes, I suppose you guys are right. It was a quick thought, as the title says :)

But, my point is, he has to "take" the money, right? So zloj, you've kind of hit on it there. He gave the money to his buddies. He's not going to take it from them. So how does he get it back? You're right, he won't even bother.

That of course, means that he's full of crap when he told us (and his compadre in intellectual duplicity Paul Krugman told us) that they could remove the excess monetary creation when things picked up again.

Actually, things are a little more complicated. At some point the government will sell its stake in GM, C, and AIG, so some of that liquidity will still be absorbed (Bernanke will print money for GS, and GS will use it to buy AIG from Bernanke). Also, any trickle-down effect will be gradual. For the next year or two people will still deny the inflation link. Then of course inflation will arrive on schedule, but some people who anticipate it too early will still be disappointed.

Ummm...last year the US govt collected 2.5 trillion in taxes, not 1 trillion. So 450b in interest payments is not that huge. Also, China has been printing money like crazy for 8 years just to keep their Yuan pegged to the USD. So apparently, sometimes (not always) printing money is the way to go. Unless the Chinese are idiots as well, which I would bet, they are certainly not !

I don't understand the mechanics of creating or destroying money. The accountant in me asks:

If the Fed prints more money, then does the bank getting the new cash create a liability on their books as a loan from the Fed? What if they don't want any cash :) ... maybe that is a dumb question.

So if the bank lends that money to me and I pay it back, then does the bank return the cash to the Fed and keep the interest? Then does the Fed "burn" that cash they got from the bank? Is that the destroying part?

Citibank takes out a loan from the discount window (FED) at 0.5% interest then turns around and loans the money to you (on your credit card) at 26% interest and guess what... if you manage to pay back all the money in one year.... then poof 25.5% more money has been created out of thin air. This is one way money is created.

whereaminow

HaHaHa - I love the visual of Bernanke burning down the fed - I see a Mr. Burnsesque figure from the Simpsons with an evil look and laugh!

Ahhhhh.. see now we get into the nitty gritty of my differences with Fed planning. Now in the example you cite, this type of money creation is probably bad, since there will not be a corresponding increase in worker productivity (at least not likely) from the consumer's use of a 26% interest rate credit card. Yes, someone will make money from it, but it's not the type of sustained economic improvement that we need to justify the increase in the money supply.

In the same way, if the Fed intentionally makes credit far easier than savers would (if savers set the interest rate - free banking solution - where bad banks fail with no handouts), it not only distorts consumer purchases but also capital goods. This is much more damaging to an economy, as we see now.

Creation of money is not the evil. It's how and why it's created that is the problem. Money is a tool of commensurability to make exchange more efficient, but it has been changed to imitate the actual driving force of the economy.